AssetBuilder Inc. Registered Investment Advisor - Simple Investing. Smart Future.

Scott,

You've pretty much trashed every type of annuity except a single payment immediate annuity (SPIA).  Your columns that brush on these aren't unequivicable.  You seem to like them at times and not at others.  Perhaps if I give you my situation you can give me a clear indication of what you'd recommend for me.

I have a small collection of pensions that will pay me a non-COLA'd $15,000 annually in 3 years when I turn 60.  I'll receive the maximum social security payment based on my income which I plan to defer until age 70.  My wife will start her SS at the earliest possible time and it will be based on my earnings.  We have approximately $1MM in IRA money and $200K outside of the IRA.  Retirement will begin at age 60 unless I lose my current job for some reason. 

When I ran FIRECalc, the 95% safe spending from this portfolio and retirement streams is $86,800.  We can easily live on this with plenty of money left over for travel and spoiling the grandkids.  Buying a SPIA increases the spendable amount slightly but dramatically limits the portfolio upside.  Paying off the mortgage seems to have an even better return than an annuity because it reduces the actual cost of living fairly dramatically.

Longevity does not run in my family but my wife's family has consistently made it to 85 plus.

What are your thoughts?  Thank you.

Ken  

Ken,

Your observation on the annuity-like benefit of paying off a mortgage is right on. Basically, paying off a mortgage gives you a life-time pass on debt service but, unlike an annuity, you still have the money in the form of increased home equity. So I would pay off any mortgage debt well before buying a life annuity.

Your deferral of Social Security benefits amounts to a major purchase of a life annuity. The longer you defer, the greater the benefit increase and Social Security is an inflation-adjusted joint and survivor life annuity. Since you will be spending some of your IRA or other savings to support your household, the period from now to age 70 is one where you are, in effect, exchange volatile IRA assets for safer life annuity assets.

The studies I have seen indicate the trading investment assets for a lifetime annuity DOES dampen the upside but it also dampens the downside and increases the odds that your lifetime income will be sustained. The only question is the lottery ticket of our estate size. In your case, with a 95 percent chance of achieving your goals without buying a life annuity, it's hard to make a case for needing one. If your chance was only, say, 70 percent, however, it might be a really good idea to consider using a life annuity. That, by the way, was the basic issue Price Waterhouse was trying to address in their recent study. You can read the column on it at this link and download the study itself, "Retirement Vulnerability of New Retirees" from a link at the bottom of the column.

 http://assetbuilder.com/blogs/scott_burns/archive/2008/08/15/will-you-die-broke-maybe-not.aspx

Scott